You need to price a put option on the stock of APPLE with an exercise price of $50 and six months to expiration. The current stock price of APPLE is $52, the risk-free rate is 10% p.a. (c.c.) and the volatility of the stock price of APPLE is 30% p.a. APPLE will pay a dividend of $1 in exactly four months’ time. This put option is to be priced using a two-period binomial option pricing model, with three months in each period.

QUESTION: Draw the two-period tree diagram for the adjusted stock price (that recognizes the impact of the dividend) of APPLE. Show the expiration date payoffs from the put option.

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16922 The question is based on the valuation of option contract b... View the full answer